A decade ago Jim O'Neill, then Goldman Sachs head of global economic research and commodities and strategy research, coined an acronym that has increasingly come to dominate the last decade in a study reported entitled, "Building Better Global Economic BRICs." Despite the coy cuteness of the title, the paper's content was both serious and prescient, predicting the rise of the four BRIC economies - Brazil, Russia, India and China - over the next few years.
O'Neill's forecast has come to pass, but what is interesting about the rise of the BRIC economies is that only Russia is a major energy exporter, vying with Saudi Arabia for the world's number one position. Both India and China have to purchase expensive energy imports to fuel their economies, which leaves Brazil as the median state - since the beginning of the year, it has been a modest net energy exporter, greatly pleasing Brazil's government and treasury.
While Brazil is seemingly poised for not only soaring economic growth, its energy sector is about to boom as well, and herein lies a cautionary tale, nor for individual investors, but for those seemingly invulnerable economic colossi, the multinational oil companies.
As oil is the world's most fungible commodity oil companies have unprecedented economic clout and political support that it buys in most countries and they usually use that massive influence to improve their bottom lines regardless of the lopsided deals that they forge with resource-rich but…
A decade ago Jim O'Neill, then Goldman Sachs head of global economic research and commodities and strategy research, coined an acronym that has increasingly come to dominate the last decade in a study reported entitled, "Building Better Global Economic BRICs." Despite the coy cuteness of the title, the paper's content was both serious and prescient, predicting the rise of the four BRIC economies - Brazil, Russia, India and China - over the next few years.
O'Neill's forecast has come to pass, but what is interesting about the rise of the BRIC economies is that only Russia is a major energy exporter, vying with Saudi Arabia for the world's number one position. Both India and China have to purchase expensive energy imports to fuel their economies, which leaves Brazil as the median state - since the beginning of the year, it has been a modest net energy exporter, greatly pleasing Brazil's government and treasury.
While Brazil is seemingly poised for not only soaring economic growth, its energy sector is about to boom as well, and herein lies a cautionary tale, nor for individual investors, but for those seemingly invulnerable economic colossi, the multinational oil companies.
As oil is the world's most fungible commodity oil companies have unprecedented economic clout and political support that it buys in most countries and they usually use that massive influence to improve their bottom lines regardless of the lopsided deals that they forge with resource-rich but poor countries sitting atop energy assets.
For a country like Mauritania, the only choice is to accept or reject the terms. For former Soviet countries surrounding the Caspian, a percentage of profits was initially preferable to zero for both Azerbaijan and Kazakhstan, but the government of the latter several years ago began to chafe under what it regarded as the overly inequitable terms negotiated in the early 1990s, and pressured the companies involved in the Kashagan offshore consortium to shave a couple of percentage points apiece from their holding to transfer to the state oil and gas concerns.
The more prosperous a potential oil-producing country is, the less clout they have and lurking in the back of every oil executives' mind is his deepest nightmare nationalization and expropriation without compensation, as happened in Venezuela.
Brazil has taken a different tack, as on Friday Brazilian Energy Minister Edison Lobao said that the government intends to reclaim promising offshore oil exploration blocks awarded in 2006, telling reporters, "Brazil rigorously honors its contracts, but there was no contract of any kind signed in relation to the eighth round, which the National Energy Policy Council decided not to carry on further."
The 10 oil bloc concessions in question are offshore of Rio de Janeiro and Sao Paulo states in its southern Atlantic Santos Basin, which includes the Tupi field, renamed Lula, and Cernambi, with the two sites alone estimated to contain 8.3 billion barrels of oil and natural gas, the biggest ultra-deep water find in history. The blocs are located in a "subsalt" region, which is believed in total to hold more than upward of 50 billion barrels of oil.
The Tupi field was discovered in 2007, mere months after the concessions were awarded, as Brazil's state oil company Petroleo Brasileiro (Petrobras) announced the first of a series of massive deep-water discoveries in the sub-salt region.
Soon afterwards Brasilia halted all new auctions of deep-water fields. In 2010 Congress approved a law ending the existing exploration and production concession model, changing governmental policy to a production-sharing model to develop the country's future oil reserves.
Companies directly affected by the recall of the concessions include Petrobras, Italy's Eni, Spain's Repsol, India's ONGC and Norway's Norsk Hydro.
So, what next?
Expect to see some legal challenges mounted by the aggrieved energy companies against the government, but given the scope of Brazil's reserves and the fact that it is both Latin America's largest and most dynamic economy, it seems likely that the government's decision will generate more sound than fury, with the majority of large oil firms grumbling loudly but retaining an interest in working in Brazil.
And what if the oil majors decide to go home in a sulk? Well, next week Petrobras intends to sell its first natural gas from Lula pre-salt deepwater oil field, and oh, Lula is currently producing about 30,000 barrels of oil per day as part of a pilot production project.
Think that Petrobras needs massive foreign oil company investment? Think again, as on 31 August Brazilian Planning Minister Miriam Belchior released statistics showing that Petrobras will invest nearly $55 billion in 2012 alone.
So, the choice for the foreign oil companies is simple - create a legal fuss and walk away, or stick around for a piece of some 50 billion barrel action in the only BRIC in the Western hemisphere. Time for the oil companies to read the fine print.
Simple, really.
By. Dr. John C.K. Daly